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The Breakfast Briefing

Worries about Cyprus may be fading, but they shouldn’t be forgotten.

The latest euro-zone flare-up has been relegated to a shrug for traders, pushing the S&P 500′s run at all-time highs to the forefront. The fact that another record chase coincides with the recent mess in Cyprus illustrates how the rally keeps rolling along while dark clouds loom above.

Yesterday’s rally pushed the index to less than two points from its record of 1565.15, achieved on Oct. 9, 2007.

Milestone mania hit markets earlier this month when the Dow Jones Industrial Average joined the Wilshire 5000, the Russell 2000 and the Dow Jones Transportation Average in record territory, while the broader S&P 500 lagged a bit behind.

The psychological impact of the broader S&P 500 joining the record-high club shouldn’t be lost, even as its timing has brought back some bad memories.

“The events in Cyprus provide another very visible—albeit extreme—illustration of the financial problems which are holding back the global recovery,” says Julian Jessop, chief global economist at Capital Economics. “Indeed, even though the Cypriot economy itself is tiny, the ramifications could still be felt worldwide, both in economic activity and market volatility.”

Mr. Jessop points out the bailout will have “damaging effects” on Cyprus’s economy. It also raises fresh questions about the stability of the currency union.

“It is premature to conclude that Cyprus’s membership of the currency union has been secured, given the deep and prolonged recession now facing the country,” he says. “The departure of even a tiny country from the euro could become a model for others to follow, especially if the exiting economy subsequently rebounded.”

Such a development could ripple through economies around the globe, he says. “At the very least, it could bring to an end the current period of low volatility in financial markets.”

That may be so. But in the short run, the focus on the S&P 500’s record chase has the potential to drown out the lingering concerns sparked by Cyprus.

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